Emerging markets v. developed markets after Covid-19

These are strange days across all the markets. Developed markets coped with the global pandemic better than most financial analysts forecasted. Now, with vaccine programs being successfully rolled out and government stimulus packages helping businesses recover, developed markets are buoyant.

The story is different for emerging market. Some analysts began this year forecasting a bull market, with a return to normal trade merely delayed to later in the year. However, with the emergence of new variants, paired with poorly conceived vaccine rollouts, many emerging market managers have revised their bull forecasts.

Vaccination Campaigns Lagging

As well as exacting a terrible human cost, new variants in countries such as India and Brazil have also hit their stock markets and currencies, which are both large components of the emerging markets index.

Much of this is down to slow vaccine rollouts. Whilst in Europe and the US third waves of the virus are levelling out as vaccination programs ease the situation, many developing countries are now struggling to cope with their worst outbreaks.

The effects are obvious on the emerging markets. The pick-up in the European and US markets shows a stark contrast to that of the emerging markets. In sterling terms, the MSCI Emerging Markets Index has risen 4.1% in the year to date. By comparison, this is less than half the 8.3% rise tracked by the MSCI World Index for developed markets.

The spread of variants such as the Nepal variant in India is well documented, but other countries such as Turkey, and much of Latin America including Brazil are still dealing with significant increases in case numbers. Although vaccine rollouts will suppress these numbers, in most of the affected countries vaccination programs are not advanced enough to make a huge difference.

Whilst this situation remains, global economic recovery will be impeded, particularly on those economies that are reliant on the travel and tourism industry.

Hope for the Future

The picture may look bleak in the short term, but there are reasons for optimism. Most forecasters say they expect badly hit countries and regions to recover strongly as vaccination programs belatedly take effect. Emerging market analysts believe that the recovery of these markets is still on the cards but is likely to be delayed by a few months.
Another factor that is likely to help emerging markets is strong US economic growth, which is fueling a boom in commodity and energy prices. A factor that will help regions like Latin America, a net exporter of natural commodities, to recover. In the medium term, the economic restart that Europe and the US are experiencing is likely to continue pushing commodity prices higher. For countries like Brazil, this is likely to help kick-start their economies.

Other Bull analysts cite the picture over the last ten years as being key to an emerging market recovery. Over this period the MSCI World Index rose 211%, three times the MSCI Emerging Market increase of 71%. This, they believe, leaves plenty of room for an extended run for developing equities.